Despite a weak market environment, asset inflows into long-term mutual funds turned modestly positive in the month of September. Here to add some color on what investors have been buying and selling is Kevin McDevitt, he is editorial director for Morningstar.

Kevin, thank you so much for being here.

Kevin McDevitt: Thanks for having me, Christine.

Benz: So Kevin, one thing I want to talk about, something we've been examining, is the asset class of money market mutual funds. We've seen such an exodus of shareholder money from this category. I would like your take on what's going on there?

McDevitt: Sure. Well, you continue to have very strong outflows out of money market funds this year. Through September we've seen over $160 billion come out of money market funds. What's interesting about that, though, is most of that money is not flowing into long-term mutual funds. In September, you had about $14 billion come out of money market funds, but only about $3.8 billion went into long-term mutual funds, and what's striking about this is that in a year like 2009, when you also had very strong flows out of money market funds, in that case, though, you had pretty much all of that money flow into long-term mutual funds. But in this case, that money is leaving the system; it's not going to long-term mutual funds. It's coming out of money market funds, and it's going someplace else, possibly to banks, possibly to be used to pay off debt, possibly used for consumption, but the fact is, it's not going to long-term mutual fund.

Benz: You did a little poking around, though, Kevin, and at least based on FDIC data, it doesn't appear that it's necessarily flowing into bank accounts or money market accounts run by banks?

McDevitt: Right, that's been another surprise. Again, as you mentioned, you saw very strong increases in bank deposits in both 2009 and in 2010, and that's despite the fact that the Fed had cut rates to zero, and savers weren't get anything, as they aren't today, weren't really getting anything on those accounts. What's changed so far in 2011, and we don't have full data through the third quarter of this year, but what seems to have changed is that, that growth in deposits has really slowed substantially so far in 2011.

Benz: So let's shift gears, Kevin, and talk about some of the long-term asset classes. It's obviously been a very volatile and scary market recently. Are investors demonstrating a preference for safety when it comes to their bond and stock funds?

McDevitt: Really the surprising thing to me is they are not showing a strong preference for anything anymore. You have seen continued outflows in the usual places. For example, you have seen outflows with U.S. stock funds, but what was surprising there is that the pace of outflows slowed substantially. You had about $6.8 billion in outflows out of U.S. stock funds last month, but that's down from $15.5 billion in August, and then down from about $28 billion or so in July. That's even though ... the S&P was down another 7% in September, so you'd have perhaps expected to have seen more outflows out of U.S. stock funds, but it didn't happen.

But more to your point in terms of where did you see some investor interest, there is no one area that is really that terribly strong. You saw some money coming back to municipal bond funds; you had about $1.7 billion go into municipal bond funds, which was actually the greatest level, the highest level since October of last year, but still $1.7 billion is not really anything terribly substantial. And you saw some flows going back into intermediate-term taxable bond funds, but again only in that $2 billion to $3 billion range, and that's a lot different than perhaps the $15.5 billion or so average we've seen over the last three years.

Benz: Right. Maybe investors are looking at bond market performance and actually seeing that as a pocket of strength, so some appear to be gravitating to those categories.

Kevin, one thing I want to cover with you is the emerging markets, which continues to be a real pocket of strength when you examine these flows, but the performance from emerging-markets funds hasn't been all that hot. What are you thinking in terms of why investors are continuing to shovel money into emerging markets?

McDevitt: Right. You did see positive flows. I think, again, in about the $2 billion range for emerging-markets stock funds, even though they were, on average, down about 15.5% for the month. And that suggest, perhaps, that investors really are not chasing performance as much as we had feared in the past. Maybe perhaps this is more of a strategic commitment from investors, and you're seeing the same thing with emerging-markets bond funds as well. You saw about $800 million of inflows into that category, despite the fact, again, that I believe the category was down about 7.5% for the month, which was one of the worst categories, if not the worst category among taxable bond funds.

So, again, perhaps this is more of a strategic commitment that investors are making to these asset classes. That said, though, the skeptic might argue, too, that investors just haven't gotten their quarter-end statement yet.

Benz: Maybe they won't be so enthusiastic about emerging markets after that.

Kevin, how about this trend toward indexing, which we have been discussing on and off for the past several months? Was that something that you witnessed in these flows?

McDevitt: Yes, it was. In fact, ... one of the few U.S. stock categories with positive flows was the large-blend category. And it wasn't anything substantial--it was only about $300 million. But ... most of the funds that took in positive flows for the month were index funds--mostly Vanguard funds, but there were other funds in there, too. A few from ING and Fidelity had positive flows as well. So to the extent that you're seeing any positive sentiment for U.S. stock funds, it tends to be on the index side.

Benz: You mentioned Vanguard. Any other notable fund families in the mix here when you examine inflows and outflows?

McDevitt: Sure. They continue to be strong.

On the bond fund side, PIMCO Total Return was the top fund for the month. You also saw Jeffrey Gundlach's fund, Doubleline Total Return Bond, had strong flows for the month as well.

One fund that slid a bit in terms of inflows was Templeton Global Bond, Michael Hasenstab's fund. Flows were down a bit there to about $500 million from ... it's been in the billions for months. That's not too terribly surprising, though. That fund has struggled a bit performance-wise for the year-to-date. I think it's in the bottom 10% of its category.

Benz: Kevin, thank you so much. It's always great to hear your insights on these fund flows and what they say about investor behavior. Thanks so much for being here.